Author: Jay Unni

Value investor and occasional speculator.

BNCC

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The stock is up huge after a fantastic earnings announcement – a nice 44% gain. The growth in earnings is mainly from the mortgage brokering business, as I predicted here.

The rig count in North Dakota has moderated from a peak in late May, which may mean a moderation in the demand for housing by new workers to the region. However, interest rates are still low, providing impetus for all those who are paying astronomical rents in North Dakota to switch to a purchased house.

I am considering selling half of my position, as there is a chance that the market price drops significantly as the $17 mm takes place during the third quarter, and this may be a local maximum in the stock price. Also, I will probably need a little more powder in the keg.

I expect the general market to decline in late August or early September, which will probably offer a great buying opportunity. If this happens, I need to have some reserves ready to buy my favorite stocks right now.

Green Mountain Coffee Roasters

On By Jay UnniIn Investing1 Comment

So the downward momentum has finally broken on this stock.

After the earnings announcement, the overblown negativity will begin to dry up, and the short sellers will start a reflexive process of covering, raising the price, and forcing more short sellers to cover. This should lift the stock price significantly.

I have begun to purchase shares, but I have only purchased a small amount. I am expecting a pullback, because the intial enthusiasm is bound to moderate before the upward momentum resumes. On the other hand, I do not want to miss out on any upside that occurs from the early short covers.

Disclosure: I am long GMCR.

Today’s ideas

I was considering speculating on the power outage occurring in the Eastern U.S., but I am not seeing what I thought I would see.

In the power outage of the Northeast in 2003, the company most affected, First Energy (FE), dropped a lot after taking blame and the brunt of the damage. However the most affected companies in the power outage, AEP and FE, have increased since the outage. Something else is at play here… or these are good short candidates.

GMCR is up another buck today. I am feeling foolish for not trading out my ATVI this morning.

But perhaps there is a silver lining. Vivendi is seeking a buyer for its majority stake in ATVI. I think this could be bought out at a significant premium – but only if Vivendi pushes for it. ATVI is probably worth close to $17 a share, but Vivendi has to hold out for a company to step in and buy.

Who might the buyer be? Perhaps media giants like Viacom (VIA), Disney (DIS), or News Corp (NWS) after it splits. But who really knows? Corporations are still sitting on a lot of cash, so they may be willing to pay up.

Ideally, multiple companies will start a small bidding war for the ATVI stake, and we will get a price that is between $14-20/share. Worst case, Vivendi is desperate to raise cash and sells to the first bidder it can get for a price that may be slightly lower than the current price. I’d say that $11 a share is a minimum in the worst case scenario.

Vivendi does probably want to shore up its balance sheet – as a French company, it needs to insulate itself from the worst of the crisis, which is yet to come. This means that the maximum upside of $20/share is unlikely.

So we are looking at a risk/reward of about a 10% loss to a 15% gain, with a remote possibility of as high as a 65% gain. The risk/reward ratio dictates that I should hold my ATVI shares.

With GMCR, I’d say that we have seen a bottom of $20 ($19.83 to be exact), which is a 15% downside at least, and the stock could tank further if the SEC brings up charges. However the upside is probably around $60 a share, which is 155% higher, albeit over a longer time period.

The rises in the price must have scared out short sellers, which explains why the upward momentum has lasted for three sessions.

There is a similar story playing out across three different stocks, GMCR, TPX, and DMND. Let’s call them the “fallen angels”; stocks that were once revered and pumped up by Wall Street, rising in a reflexive manner as highly-leveraged momentum players ploughed in, that crashed precipitously as problems arose. There is even similarity in the prices of the stocks post crash – with GMCR and TPX almost mirroring each other down to $20, then back up $23.50.

However the fundamentals of each situation are far different. The problems facing GMCR have already been discussed – concerns about competition, patent expiration, an accounting question, and a slowing growth rate coupled with ridiculously high expectations. The margin call on the founder pushed the stock downward in a reflexive deleveraging.

The concerns on TPX are verified by management – a low guidance, and an expectation of an earnings decline by 50% or more. The concerns on DMND are also quite justified – an accounting problem seems more likely, and DMND has missed a crucial filing deadline, suggesting a real management problem.

So short sellers have been making a killing on these stocks – and perhaps these are the same entities on all of them. This would mean that rises in one might trigger short covering in the other. But whether or not that is true, all three have been rising, which should trigger shorts to cover and propel the stocks higher in a reflexive fashion.

The real question is are the shorts done covering? Which stocks are they leaving hanging, and which ones are the jumping out of? To answer this we can consider the short interest as a % of Float.

“Fallen Angels” Short interest as a % of Float
GMCR 17.74%
TPX 7.92%
DMND 49.11%
So DMND is the most heavily shorted, but probably for good reason. TPX is the least, which is odd, but perhaps all the shorts have exited.

The short interest in GMCR has decreased since June 15, when it was 19.7%, but it is still substantial – shorts have a ways to go before they finish covering, or they are holding out for the accounting questions to come back with some negative news.

The spike at the end of today signals that there was a rush to cover… perhaps this could continue into Friday. I am thinking that a short seller would not want to hold the short over the weekend… but I have not been a short seller before, so I don’t have a good understanding of the mental state…

On the macro side… the European regulators cut rates, leading the Euro down against the CAD. I am continuing to watch at this point, though I am kicking myself for my cautiousness in avoiding the trade. I am waiting for some sort of a pullback before I enter. After such a sharp move, it should experience a pullback and some kind of consolidation around a price. Around that time it may be good for entry.

Canada is probably the strongest bet I can think of currently – it has the safety of a developed nation coupled with an export economy. Plus, it has the upside of the Keystone pipeline.

I expect that Obama will concede to the Keystone pipeline after the election. If Romney takes it, he will certainly pursue the pipeline. Obama likely could not agree to the pipeline pre-election because he was depending on environmental groups for campaign financing. By delaying the decision, he has ensured their support in the election, and to a large degree, the nation is not really upset that the pipeline was not acted upon, because most people are not really aware of the benefits.

Japan has been having problems obtaining funding from its parliament. It seems that after years of sitting on massive debt/GDP levels, they are finally starting realize that this may become a problem, after seeing how investors have been treating European nations with high amounts of sovereign debt. However, the effect of this realization has been detrimental. I am reminded about something that George Soros remarked in Alchemy of Finance – once regulators recognize the problem, they tend to take action that actually makes it worse, before taking any action to make it better. That seems to be the case here.
The situation is similar to what the U.S. experienced last fall, when Republicans in Congress threatened to block the raising of the debt ceiling. If the result is similar, then one would expect a lower yen against the dollar. The dollar dropped versus the yen 250 ticks during the debt ceiling debacle, but the largest drop happened in the wake of the Standard and Poor’s downgrade of U.S. debt, which triggered massive volatility in U.S. markets. The drop in the dollar probably occurred because of outflows from the equity markets and treasuries…
We might get a similar flight from Japan if the debate really reaches a fevered pitch, but I have not seen enough evidence to act yet.

The Norwegian Kroner has been bullish versus the Euro pretty consistently over the last 5 years.  The Kroner ought to do well in an environment of $100+ Brent, which it looks like we are entering – provided the oil worker strike in Norway ends soon. And my Norwegian seismic companies, PGS and TGS, may finally see some profit. They are seeing growth coming from West Africa… which leads me to wonder who is ordering these seismic studies…

Oooh, a juicy one here: Chariot Oil and Gas. It trades on the Grey Market here in the states, but it is a stock listed on the AIM market of the London Stock Exchange. It has a large acreage position offshore West Africa, and it has done huge 3D seismic studies on its acreage. The sheer size of the play involved is mind-boggling – it may end up dwarfing the North Sea plays…
The plus on this acreage is that it is not a salt basin, like the huge offshore South American reserves.
Chariot looks pretty good, with a low estimate of prospective reserves sitting at 7,032 bbls, unrisked. With a market cap in the 300 millions, this looks like a solid bet.

Chariot has not gotten very far in exploring this find – it has only finished one exploratory well, which was a dud. It has 4 more exploratory wells planned, with one that is to be completed at the end of this month. If even one of them pans out, the stock could double, triple, or… ?

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VIFL Update

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Looks like VIFL may be continuing the move higher. Maybe it will break above the resistance it has set. It has been slamming into resistance in the low $7’s, then dropping to a low point before returning, but these low points have been increasingly higher. This is definitely a bullish technical, and part of the reason I won’t be selling my VIFL anytime soon.

Market Overview

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I have been getting anxious lately, because I did not have enough free cash to feel good about committing more. However, prices in the market were very tempting.

Now, my recent doubling of my stake in Activision has begun to pay out, so I perhaps I can take a quick profit from half, and leave the other half to run. IMAX is also beginning to look ripe for a sell. Though it is not at its peak for the year, I am still up 33% from my buy-in less than a year ago. I am convinced there is still a final puff left in this cigar – I want to hold until we get closer to the Spiderman and Dark Knight release dates. 

It is clear that Dark Knight will be a hit, but I wonder if investors have factored in the fact that Dark Knight lends itself to IMAX theaters more than most other blockbusters? I am not sure whether to attempt to sell out in the week before or to wait until after the release, to see if the success does end up surprising the market. 

In either case, the stock may not perform if the market tanks precipitously. That, I think, is the bigger danger in holding onto my IMAX positions – I will not have the cash free to buy if the market does tank. To mitigate that risk, it is probably a good idea to take some money off of ATVI. 

Green Mountain Coffee Roasters (GMCR) has been looking attractive at these prices. I think at $20, the risk is certainly worth the potential reward. At $22.48, Tuesday’s close, the risk is slightly higher, but still attractive. I will likely write a Seeking Alpha article on this idea in the next few days, so in the interest of keeping that content exclusive, I will not delve too far into my arguments. I will suffice with a few key points that are striking my interest: decreasing inventories, no new share issuances (other than compensation), P/E far less than growth (even after expectations come down, which they will), competitive advantage in the New England area (First Mover and brand name recognition). The key risk is the SEC investigation of inventory accounting, but the Starbucks competition and patent expiration ideas are not as serious as the market thinks. 

One new company on my watchlist, and this is an odd one, CKX Lands (CKX). This is a lands rights company in Southwest Louisiana, that makes money from oil and gas royalty payments. There are established basins in the region that the company has been relying on to pay dividends and purchase more rights, however I think there is potential for a new sourcerock: the Eagle Ford. The idea that the Eagle Ford might extend in several Louisiana counties is being tested with some exploratory wells. In late 2011, there were some promising results out of the first wells, but I think we will need a few more exploratory successes before this becomes a sure shot. If the Eagle Ford really does extend into lands owned by CKX, then there could be potential for huge growth in the payments that CKX is receiving. The stock has also popped recently, so it might be worth it to wait for this one to cool off. 

I should probably steer clear of macro investing after my Spanish debacle. I closed out my position a in the days leading up to the Greek elections with about a 60% loss on the puts. I had been hoping the Syriza party would be projected to win in the days before, so that they might choose to reject the bailout, leave the Euro, and cause panic reactions in the markets of Spain and Italy. However, New Democracy became the front-runner in the polls, so I could not ignore the consequences and closed out for a loss. Indeed, the New Democracy party took the election, and with it, the bailout terms.

I am tempted to foray again into macro – this seems like such a tumultuous time in macro events. But I will wait before venturing in, and next time, I will do so with a lower degree of leverage. If I use options, I will use farther dated or more in-the-money options, or if I use currencies, I will use low leverage levels. 

After re-reading parts of Alchemy of Finance, I am beginning to see the advantages of the structure of Quantum Fund. By investing in extremely undervalued companies, which are essentially low-risk and high-reward, you can lower the downside for the overall portfolio. Smallcaps may have large amounts of volatility, but more illiquid companies, like BNCC, change price very infrequently, and so can vary downwards only so much. By investing all available cash in companies like this, you can free up all of your available leverage to speculate on macroeconomic events. 

Spain

On By Jay UnniIn SpeculationLeave a comment

The perception on Spain was more positive last week, or at least less negative, causing a pullback in the downtrend in Spanish stocks. However, this was short lived.

The expectation was some sort of “grand fix” that would rescue the Spanish banks, and thus, the economy. What the market is hoping for, and will not get for the foreseeable future, is an insurance on deposits to defend against a run on the bank, similar to the FDIC guarantee in the United States. However Germany and the Sweden have both signaled that this would be unacceptable. As Germany’s finance minister has said, joint liability would not be acceptable without joint decision making.

Instead, Europe has agreed to lend to Spain $100 billion euros that Spain will then use to purchase equity in its banks.

I think this is actually a good idea. Rather than indebting the banks with more loans, as the United States did with TARP funds, a purchase of bank shares boosts the value of the banks’ equity, which will then allow the banks to directly lend MORE, by reducing the debt-to-equity ratio.

However, the market turned negative after the announcement. The package was not as robust as was hoped, and further, the new loans will have to be paid back before other Spanish bondholders are paid. This does not secure the bondholders place, so yields are rising, and going to continue to rise for the near future.

The worry now is about the Spanish government‘s ability to raise new capital, and to meet its existing payments. Reflexively, these worries are causing them to come to true – as pessimism increases, yields on Spanish bonds increase, and Spain will have to pay higher rates on new debt issued.

These worries are new. Previously the only real concern was the banking system within Spain; the Spanish government itself has a debt to GDP ratio much lower than the other at-risk countries – Portugal, Ireland, Italy, and Greece.

However, it is the original concern about Spanish banks that will have the greatest impact on Spanish stocks. The credit contraction is sharp and will continue – banks cannot lend, because their borrowing costs are high and increasing. Spanish homeowners are saddled with debt, and at least 20% are unemployed.

A reflexive process is also at work, further exacerbating the situation. Ratings agencies are downgrading the debt of the Spanish banking sector, causing borrowing costs to rise, which may trigger further negative perceptions.

The link is clear, and the situation will deteriorate. However, the process is not sustainable, and it will not continue forever. The bailout package, or a future move by the ECB, may have a positive effect in the coming months. But in the short term, I continue to be bearish on the Spanish stock market.

I have a short out via puts on the iShares Spain ETF (EWP). Luckily I was patient enough to wait out the pullback, and I got in late late last week. I am hovering at about cost basis on them, but I believe that perceptions will worsen as we near the Greek elections. The puts are only worth about 1% of my portfolio, so I am not too worried about being wrong – which is likely – because the other 99% of my portfolio is long and will rise if perceptions suddenly turn around. On the other hand, if I have read the market correctly here, I will be able to mitigate the fall in my stocks and maybe end up with greater profit than if I had done nothing.

In the meantime, I am looking to accumulate shares of profitable U.S. stocks, and stocks in Europe that do business outside Europe, like Catering International Services (CTRG) and Petroleum Geo Services (PGS), both of which are linked to commodities. I think we are nearing a bottom on oil, as the Saudis have reached their goal of $100 oil prices (Brent crude) and will probably start to reduce production. So, I might like to accumulate more oil service names, like C&J (CJES) and Halliburton (HAL), but I am hesitant because I am already so overweight on the sector (it represents more than 50% of my portfolio).

Why I Sold FactSet

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http://seekingalpha.com/article/632111-why-i-just-sold-factset-data-systems

Just published an article on Seeking Alpha on why I got out of FDS. Got a good return, but got out at the right time. Unfortunately, with the editorial delay, the stock has declined a bit between writing and publishing. Not complaining, just saying…

Now, this should free up some capital for some other ideas. I’m looking at undervalued companies across Europe, in South America, and the United States as well.

I just purchased some shares of BNCCorp (BNCC.pk). It’s a small regional bank traded on the pink sheets. I’ll have an article on the reasoning soon. I figure the downside is limited to about 10%, while the upside is anywhere from 50-100%.

Spain Looks Like A Perfect Short

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Shares of the ISCI Spain Index Fund ETF (EWP) have been in a tailspin for the last two months, as depositors have withdrawn from major banks fearing for their cash. It is looking like Greece’s withdrawal from the Euro is almost certain, and Spain will be up as the weakest link after Greece withdraws.

The withdrawal of Greece from the Euro will probably have a domino effect, causing shares of Spain’s Index to tumble as well. However, in the short term, if regulators announce some sort of a guarantee for depositors, EWP could pop temporarily. I will be watching this closely as a possible short for the next few days.

Update on Longs – Activision, RealD, IMAX, C&J Energy Services, Halliburton

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The market seems to be valuing many of the consumer discretionary stocks lower as participants suddenly remember the Europe situation, and begin to recognize the excesses of the first quarter bull market.

I will keep buying up shares of Activision (ATVI) as it drops below $12. It has been hovering near $12 since Monday. The market is incorrectly valuing how much money will come from Diablo 3 and the second Black Ops later this year. I had not anticipated how successful Skylanders would be. All this extra upside now adds encouragement to my original long case, thus, I am adding to the position.

Real D (RLD) is trading too low again. As its theaters approach maximum capacity in the U.S., its capital expenditures will begin decreasing and free cash flow will begin to increase. Its rate of capital expenditure has already begun to slow. Reflexivity is becoming less of a concern here because the share issuance is very little at these prices. They have been slowly wittling away cash balances, but these should begin to rise towards the end of 2012, when more big blockbusters come out.
My free cash is very limited right now, so I would wait until this becomes a better bargain. If RealD hits $10 a share, I would buy.

Imax will probably trade higher later in the year and later into 2012. Management is continually reassessing their maximum target number of screens – it currently sits at 1550, which is much higher than most analyst estimates – so these reassessments will keep raising the hopes for the future.
The bias is still negative, as analysts use last year’s income – depressed from the bad (horrible) movie slate – to value the company. The assumption is that IMAX is overvalued. However, with record numbers from Avengers, and an unexpected success with Hunger Games, the company is just beginning its run for this year. Later in the year, the Dark Knight will do extremely well, and hopefully Gelfond will recognize this in time to give it a longer run time (3 weeks or more). He is getting better about extending the run-period for the blockbusters and downplaying the movies bound to be less successful. Prometheus remains a big question mark, so my view is skeptical. Men In Black will likely do better. The Hobbit will do extremely well.
In a typical year for Imax, more than 60% of the revenues come from the top 5 movies. However, in this year, I expect the majority of revenue to come from the year’s 3 super-block busters – The Avengers, The Dark Knight, and The Hobbit.
Next year, there is another strong movie slate, with Star Trek and Man of Steel to start it off.
So I am still long. I had sold off half of my postion at $24.50 a share. The current price is below, but not enough to get me salivating again. As I said earlier, my free cash to invest is pretty low right now. I may reconsider as IMAX drops below $21.

Still, my largest position is in CJES. The drop in oil was expected, and the drop in the commodity is depressing CJES even after its announcement of earnings. I partially regret not buying as shares dipped into $16 territory again recently, but my long position is so large that I am beginning to question my own approach to risk management.

HAL remains a relatively minor position in the portfolio. The Macondo issue may prove to be bigger than I had initially realized – BP is aggressively pursuing Halliburton to push of blame for the spill. I don’t think they will have good grounds to force HAL to take on cleanup costs, but they may have grounds to pursue a suit related to a bad cement job. I do think, however, it is probable that the amount of the claims will be insubstantial compared to gigantic income of the company in the wake of the shale boom. I still believe that Halliburton remains the best positioned to take advantage of international shales. Others may disagree and point to Schlumberger as the leader internationally, and they may well be correct. However, my thesis rests on the valuation difference between Schlumberger and Halliburton remains so vast that it makes up for the cost of BP’s claims and the first-mover advantage that Schlumberger has.

 

Disclosure: long ATVI, RLD, IMAX, CJES, HAL